Apple has reported record net profits of $18.4 billion, which beat its own record as the most profitable quarter in U.S. corporate history, after selling a record number of iPhones. Total revenues reached $75 billion for the three months to December, but it’s just a 2% increase, which is a rapid slowdown from its previous double digit growth, on the back of the flat-lining sales of its iPhones. Thus, the outlook for Apple is more challenging than ever.

Chief Executive Tim Cook warned that the iPhone, which accounts for more than two-thirds of sales, may drop for the first time since it was introduced in 2007.

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It may not be surprising, since smartphone sales have plateaued in the United States as well as in Europe. Still, that’s not the only reason since growing competition is also squeezing Apple’s market share in the world’s biggest smartphone market which is China. Domestic Chinese firms, Huawei and Xiaomi, hold the top two spots in the world’s second biggest economy, pushing Apple into third place.

Globally, the competition is also heating up. Apple holds the second biggest market share after Samsung, but the next three firms are all Chinese. Lenovo joins Huawei and Xiaomi to make up the top five.

With two-thirds of its sales outside the United States, global competition certainly affects Apple’s future. But, the unsaturated markets are dominated by emerging markets which may find it challenging to pay a premium for the iPhone. In other words, unlike Android phones, prices haven’t dropped significantly for Apple’s product. And in markets such as China and India where average incomes are much lower than the United States and Europe, cheaper competitors are gaining an edge.

Of course, Apple’s future is in its own hands since tech companies depend on innovation and some argue, product diversification away from the iPhone. Indeed, Apple has highlighted the services that it provides through its data storage iCloud as well as new products like the Apple Watch.

Tim Cook also commented uncharacteristically on virtual reality (VR), saying that it’s not a niche product. Facebook has already pushed into this space through acquiring Oculus, a VR headset maker.

How successful Apple is in pushing ahead with VR or another innovation will determine whether it can hang onto the title of the world’s most valuable company by market capitalization. Google, for one, is fast on its heels.